8 Nov 2023 | 5 minutes to read
Markets responded positively to the US Federal Reserve’s (Fed) decision to hold interest rates at the November meeting. Members of the Fed’s Open Markets’ Committee (FOMC) voted unanimously in favour of leaving interest rates unchanged, commenting that already-executed rate rises and the tightening of credit conditions would “likely” weigh on growth. While a further rate hike remains possible this year, Chair Jerome Powell emphasised the progress made in dampening the inflationary pressures within labour markets and wage growth. In addition, Powell commented that, while the Fed’s own “dot plot” rate forecast indicated a further hike was in store in 2023, this forecasts “decays” as new data emerges. While the Fed’s commitment to further hikes appears to be waning fast, there is still a perceived need to keep rates higher for longer. This is still at odds with market pricing, which indicates that rate cuts are likely early in 2024.
One reason for the Fed’s greater confidence at the FOMC meeting was likely October’s employment data. The rise in employee numbers slowed significantly: non-farm payrolls increased by 150,000 in October, compared to a rise of 336,000 in September. In addition, the headline unemployment rate ticked up to 3.9% from 3.8% in September, and year-on-year wage growth slowed to 4.1% from 4.2%. While strike action had an impact on payroll data, with a decline of 35,000 in manufacturing payrolls as a result of auto worker strikes, there was also weakness in other segments of the report that were unaffected by industrial action. Growth is expected to weaken in the first quarter of 2024, and continued easing of the labour market should allow wage growth to slow to levels compatible with price stability close to 2% inflation levels.
The Bank of England (BoE) also left interest rates unchanged at the November meeting, albeit with a range of views. Six of the rate setting Monetary Policy Committee’s (MPC) nine members voted to hold rates at 5.25%. However, the post meeting statement noted that, “the MPC’s latest projections indicated a restrictive monetary policy stance was likely to be warranted for an extended period of time to bring inflation sustainably back to the 2% target...” One member voting for a hold feared overtightening, and three further members were in favour of rates rising by a further 0.25%. While there were modest changes to the Bank’s forecasts, the conditioning assumptions had changed significantly because market expectations of rate hikes have fallen since the last forecast in August. With the labour market a key concern for the BoE, Bank staff appear confident that the labour market is easing, despite problems with official employment data. The BoE is now able to point to a broad range of indicators supporting the view that the labour market is easing. Overall, the statement was clear that rates will remain restrictive for some time and that rate cuts are not imminent. Nonetheless, the Bank’s forecast sees inflation below target by the end of 2025, even if some rate cuts are priced in.
In contrast with the US and the UK, the Bank of Japan (BoJ) is early on in the monetary tightening cycle. At the October meeting, the BoJ announced it would allow the 10 year government bond yield to edge slightly above 1%, a further relaxation of the Bank’s Yield Curve Control (YCC) policy. 1% is now a “reference”, in contrast with the prior policy whereby 0.5% was a reference and 1% a hard boundary. The announcement is part of a series of measures in recent months that have relaxed the parameters of the YCC policy. The loose monetary policy stance in Japan has come under increasing pressure, at a time when other central banks have tightened policy significantly. The yen has faced downward pressure, as a result of growing yield differentials between Japan and other nations, forcing the BoJ to intervene repeatedly. In addition, Bank projections suggest that Japanese inflation will be more resilient, reducing the need for the central bank to adhere to an easy monetary policy stance.
Eurozone data continues to disappoint, with GDP data showing the economy contracted in Q3 by 0.1%. Inflation was also notably lower, falling from 4.3% in September to 2.9% in October as food and energy price growth slowed. Economic growth is expected to remain weak in Q4, making a technical recession possible.
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